Keep on going!

One statistic, genuinely impressive about Australia’s economy is that it has experienced one of the longest periods of growth in the developed world. It has delivered 27 years of uninterrupted annual growth, mainly due to a high rate of population growth and its bountiful mineral resources.

Recently, however, the Aussies have been running into a headwind blowing from China, its biggest trading partner. As shown in the chart below both economies are slowing, but from different peak growth levels; note the left-hand scale for China and the right-hand scale for Australia.

China is experiencing a much greater downward adjustment to its growth rate and economists believe this is responsible for a negative spill over to Australia, making it harder for Australia to grow. The latest reading of economic growth in Australia measured by real GDP is still okay, but it fell 0.2% short of the 2.5% forecast by economists.

Australia’s vs China’s Real GDP

Source: Bloomberg, April 2019

As a country rich in mineral resources, a significant portion of Australia’s growth is intertwined with China because of its consumption of minerals. With the slowdown underway in China the Aussies need to do something to halt the decline, especially as house prices and consumer spending have been weakening.

Politically, a desire to implement tax and spend policies is seen as a solution, but there are challenges. For example, while we lament the inability of our politicians to reach agreement on Brexit, in Australia they cannot help ditching their elected leaders. They have had 6 Prime Ministers in the last 10 years, none lasting a full term. Next month, elections take place across the country and the current government, who incidentally are quickly falling out of favour, are championing tax cuts for low- and middle-income earners. They say they can do this while aiming for a budget surplus, the first in more than a decade.

Making room for bold initiatives may be risky, but the government wants to capture the voter’s imagination; something which Donald Trump achieved with great success to get elected although some would say with dollops of fantasy.

What’s being proposed?

Tax cuts of A$158bn (£85bn) for low- and middle-income earners are being readied. This is on top of the A$144bn (£78bn) tax cuts from last year bringing the total amount to A$302bn (£163bn). To put this matter into another context China has just implemented tax cuts worth £227bn. As well as cutting tax, spending on healthcare is seen as a vote winner. Therefore, an increase in healthcare spending to a record A$89.5bn in 2022/23, a 10% increase on expected spending for 2019/20, is being planned. While many might think this would negatively impact on public finances, the government say they can achieve their objectives while achieving a budget surplus by June 2020.

The proposals above represent the largest tax package in a decade. If enacted, it hands A$1,080 back to workers earning up to A$126,000. However, some economists believe this may not be enough to have the desired impact. Ironically, critics of the stimulus may discover that China’s stimulus measures may turn out more beneficial to Australia than Australia’s own package of measures.

In conclusion, we are seeing governments around the globe shifting gear. They want to bring about lasting global growth (27 years would be wonderful!), recognising that bringing this current cycle to an end isn’t desirable or necessary. China’s marked deleterious effect on Australia is also having an impact on Europe which is exposed to China’s markets too. Therefore, we anticipate that European fiscal policy will change. They will soon loosen their purse strings, albeit reluctantly.

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